GWA navigates the COVID-19 disruptions
COVID-19 related labour shortages and supply chain disruptions are a constant theme this reporting season. And Brisbane-based GWA Group (ASX:GWA) – which imports and distributes bathroom and kitchen brands like Caroma, Dorf and Clark – was not immune. Despite these challenges, GWA was able to report a solid half-year result.
In locking everyone down at home, the COVID-19 pandemic forced many homeowners to reassess their dwellings’ utility, aesthetics, and functionality. The consequent boom in renovations, or what our industry refers to as Alterations & Additions or Repair & Remodel, remains underway.
But it’s not all smooth sailing, with supply chain chaos, including freight and logistics bottlenecks, manufacturer closures, as well as building site shutdowns triggering price rises and volume restrictions and causing chaos for manufacturers, distributors, builders and consumers.
In the interest of maintaining supply – and preserving its reputation – GWA was forced to co-charter ships, directly impacting margins in the first-half of FY22.
But despite the challenges, GWA reported several bright spots and overall the 1H22 result was slightly better than market expectations:
- Underlying NPAT rose 12 per cent to A$22.4 million, which was three per cent better than consensus.
- Underlying EBIT was also three percent better than consensus, growing 11 per cent to A$35.6 million.
- The company grew EBIT margin by 140 basis points to near 18 per cent despite the aforementioned freight challenges.
- The improvement in margin was attributed to a consolidation of the NZ distribution network, lower marketing costs as well as price hikes (three per cent in July and another four per cent in December 2021).
- Net Debt to EBITDA improved to 1.3 times (versus 1.7 times in the previous corresponding half) and Return on Funds Employed also rose from circa 15 per cent to 17.5 per cent.
Not all measures improved
Operating cash flow fell 12 per cent due to adverse working capital movements. Sales in NZ fell 15 per cent and International sales were five per cent lower, with the company attributing the weakness in NZ to a five-week shutdown, and the weakness in International markets to COVID-19 disruptions in the UK and Asia. The weakness in International and NZ however was offset by Australian sales rising six per cent. Overall, group revenue rose two per cent.
Eventually, forecast interest rate rises will crimp demand for renovations but GWA expects current momentum to continue into 2023 for both the residential and commercial subsectors. The company attributes its optimism for completion activity to labour and global supply chain disruptions extending completions from 9-12 months to 12-15 months.
Lower net migration however will keep a lid on multi-residential new starts and the company expects growth to remain flat.
While no formal guidance was given for the full year result, management is targeting second half underlying EBIT to be higher than the $35.6 million reported in 1H22.
Depending on the full year EPS forecast adopted, GWA shares are trading on a FY22 of approximately 14 times with a dividend yield of 5.5 per cent, the latter reflecting a confidence-inspiring boost to the dividend.
Perhaps reflecting the mature stature of the business however, the shares are approximately the same price they were at 22 ¼ years ago in November 1999. The recovery in multi-residential construction activity will eventually happen.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
